SHOULD YOU SWEETEN YOUR PORTFOLIO WITH SUGAR STOCKS?

Jay Patel | 11 FEB 2023

Government envisions increasing ethanol blending with petrol (EBP) to 20% by 2030.

With Indian government Ethanol Blending Program (EBP) initiative sugar sector is poised for tremendous opportunities in coming years. Optimism for Indian sugar industry is currently very high as production and consumption of sugar scales to high levels in October 2021 – September 2022 season. According to PIB release, India led's world in terms of production and consumption of sugar and India emerged as 2nd largest exporter of sugar after Brazil. India exported a record 109.80 LMT of sugar this year. International price of sugar is trading near its 52 week high zone, which contributes to high profitability for sugar companies. India recorded astounding sugarcane production to over 5000 lakh metric tons (LMT) in last 2021-22 sugar season. While 35 LMT out of 5000 LMT sugar have been used towards ethanol production and 359 LMT sugar used by sugar mills. Let's look at sugar exports season wise:

Source: PIB Releasse

Currently government has reduced export quota from 110 LMT last year to 60 LMT for current sugar season i.e. October 2022- September 2023. Reduction in export quota would ensure price stability in domestic market as supply would be higher. This would also keep inflation in sugar prices in check. Another positive outlook for Indian sugar sector comes from Brazil. Brazil production season enters post April and till then Sugar companies are poised to take benefit from high international sugar prices. Industry experts are very optimistic about sugar sector guidance as government is expected to increase export quota for sugar. If government increases export quota by another 25-30 LMT, Sugar companies would be in sweet spot.

Ethanol, a by-product of sugarcane is poised to play pivotal role in reducing India's fuel import bill. Currently, government is prioritizing diversion of sugar for ethanol production. Government is encouraging sugar mills to divert its excess sugarcane production for ethanol production. Recently, Indian government announced 100% incentive for sugarcane production given for ethanol production from B-heavy molasses, sugarcane juice and syrup.

Source: PIB Releasse

Government envisions increasing ethanol blending with petrol (EBP) to 20% by 2030. Government is currently encouraging cars makers to adhere to e20 compliant engines by April 2023 and flex fuel engines by April 2024. This policy would lead to exponential growth in sugarcane production and sugar diversion for ethanol production. This would not only minimize cost of inventory storage for companies but also improves working capital cycle thereby saving cost leading to better profitability and high return ratios. This would also helps to reduce import bill as India is one of the largest fuel importing country. Ethanol blending program provides tremendous benefits to economy as a whole as decrease in fuel cost would have rippling effects on price of other commodities and particularly inflation.

To sweeten sugar sector, government has reduced GST on sugar from 18% to 5%, this move would have positive impact on profit margins of sugar companies. Considering governments continuous efforts to support sugar industry either through EBP, sugarcane pricing policy or through various other export oriented schemes, we believe sugar companies would be in sweet spot as increasing operational margins, profit margins and sugar export quota along with stability in international sugar price would auger well for the industry.

Disclaimer: This article has been written by Jay Patel - Our Senior Research Analyst and originally published on Smart Investment website.